European bank-stress-test results were announced last week. The good news: only 13 out of 130 banks didn’t make passing grades. The bad news: this test says nothing about how well or badly these banks may do as going concerns in times of stress.

According to the New York Times, “the European Central Bank said its analysis was intended to strengthen banks’ balance sheets, improve transparency in reporting and persuade investors that these institutions are sound.”

This intent would have some credibility if before 2008 regulators had pointed out the banks that were not sound and then if some of them failed during the crisis. But there were no such judgments implying that no one could tell before the crisis which banks were sound and which were unsound.

Bank failures generally come as a surprise in crises. This is because today’s assessment of the soundness of banks is based upon so many subjective assumptions that it fails to prepare banks for the surprises extreme crises bring. The weakest link in the way current stress testing is done is the assigning of values to assets. In relation to the survival of banks in crises, it is a meaningless exercise. This is because no one knows what value these assets will have during crises. What compounds this problem is that such values-in-crisis are assigned during normal times when it is hard to envision a crisis environment.

In a conversation a couple of years ago, a senior risk manager at a large financial institution said that no one had foreseen before 2008 that the value of some the mortgage-related assets would be down by 10-15%. Everyone thought, he said, that a 5% loss would be the maximum deterioration. Actual loss turned out to be more than 20%.

So today’s stress testing is designed with the last crisis in mind. Actual results may turn out to be not as bad as assumed in such testing in some areas considered critical, but some other surprise that no one had thought of may doom institutions.

About 30 years ago, many considered banking a mature industry. Revenue growth was sputtering, as the existing pie was being shared with new players such as GE Capital and Fidelity, and higher-credit-quality companies were turning to commercial paper. The era of bank “disintermediation” was moving into high gear.

Then came an unparalleled and fairly-sudden combination of 4 dynamics: (i) quants introduced the ability to model almost every element of financial risk, (ii) an unprecedented leap in the ability to manipulate huge amounts of data allowed quant models to create financial products manageable from desktops, (iii) securitization transformed almost any financial product into a tradable security, and (iv) the transformation wrought by the preceding 3 dynamics opened the way for a vast new world of “innovation,” in which the components of financial products could be stripped and recombined into a highly leveraged, ever more abstract world of structured securities and derivatives. Take away any one of these and the last 25 years would be very different.

This combination, akin to firing solid-rocket boosters from a craft losing altitude, enabled the industry to soar into unimagined new orbits. Capital markets, once competitors, became sources of new revenues. Instead of intermediating liquidity, financial institutions began intermediating risk between sources and users of liquidity, amassing on their books huge amounts of risk that would drive their revenue models.

With so much riding on risk, institutions invested gazillions into risk management. By 2008, risk management was the most sophisticated discipline the industry had ever had. So, why were banks so badly blind-sided?